Renewal 2016 Annual Report

Transcription

1 Renewal 2016 Annual Report

2 Energold Drilling Corp. is recognized internationally for our industry-leading, productive, and environmentally-conscious drilling solutions. With 272 drilling rigs in more than 25 countries, we serve a global marketplace and a broad range of market sectors. As we renew our business with diversification into the growing sectors of geothermal energy, water, and infrastructure, we continue to serve our traditional markets in mining and energy. Our top priority is the health and safety of our clients and staff. As a vertically integrated business, with our own in-house design and drill rig manufacturer, we invest in ongoing research and development for continued improvement in our equipment s safety, efficiency and adaptability. Our mission is to help the world find more sources of minerals, energy, water and in recent years, geoscience data for infrastructures. We also recognize the importance of social and environmental issues surrounding traditional extractive practices. In our traditional markets, we are seeing the results of a continued decline in worldwide exploration budgets. In 2016, budgets fell to $6.9 billion, less than one-third of their 2012 peak, and in the mining and energy sectors the years of underexpenditure in exploration and development drilling are now showing as shortages in their project pipelines. According to KPMG, the ability to replace reserves and access new projects was the top risk in We expect this macro trend to bring about a renewal in the drilling sector in 2017 and beyond. Thanks to our diversification strategy, Energold has survived the years of low commodity prices. We have held onto our talented people while our competitors downsized. Now that capital markets are again receptive to commodity developers and explorers, we see a renewal of optimism for mining and energy, and a renewed level of capital investment, which should translate into increased levels of drilling and profits. The Annual General Meeting will take place on May 24, 2017 at 1pm at our head office: 543 Granville Street, Suite 1100, Vancouver, BC Canada

3 Diversified Drilling for Established and Growing Markets Supporting mineral exploration We are a world leader in socially and environmentally responsible drilling with a global fleet of rigs both conventional drill rigs and unique modular rigs. We help our clients save time and money with rigs that have a smaller footprint and greater portability, and do not require the construction of access roads, therefore reducing mobilization costs. Bringing water to communities Energold serves the growing need for fresh water in communities worldwide. Delivering sustainable geothermal energy We have the technical rigs and specialized expertise to serve the expanding markets of renewable and geothermal energy. Providing geotechnical expertise We are experienced in drilling for advanced engineering and construction projects including bridges, pipelines, and infrastructure. Serving the oil and gas industries Oil and gas is our largest sector in North America. We provide a comprehensive suite of energy services for the oil sands and natural gas producers. Horizontal drilling for telecom and infrastructure We specialize in horizontal directional drilling that is valuable in drilling for telecommunications, water, sewage, hydro and pipelines. Drill design and manufacturing We design and manufacture customized drill rigs and components for our own use and to serve global clients in industrial and field drilling.

4 2 3 Our offices and facilities The Energold Group operates in over 25 countries, spanning North America, South America, Africa and Europe. We continue to explore new opportunities and 12 new market sectors to bring value to shareholders and opportunities to communities Revenue by Division Energy 28% Manufacturing 15% Minerals 57% 2 ENERGOLD DRILLING CORP. ANNUAL REPORT 2016

5 Map legend Offices + Regional Facilities Recent Drilling Operations British Columbia, Canada 2 Northwest Territories, Canada 3 Alberta, Canada 4 Manitoba, Canada 5 Ontario, Canada 6 United States of America 7 Chihuahua, Mexico Head Office Mexico, DF 9 Nicaragua 10 Jamaica 11 Dominican Republic Colombia 13 Peru 14 Belo Horizonte, Brazil 15 Argentina 16 Chile 17 Warwickshire, United Kingdom 18 Littlehampton, United Kingdom 19 Germany 20 Finland 21 Kosovo 22 Portugal 23 Senegal 24 Guinea 25 Sierra Leone 26 Liberia 27 Ivory Coast 28 Gabon 29 Democratic Republic of the Congo 30 Ethiopia 31 Djibouti 32 Madagascar

6 Renewal This year s theme of Renewal speaks to Energold s strength and resilience in the face of a challenging business climate in our primary sectors. We provide drilling solutions to the global mining and energy industries, as well as to clients in geotechnical, geothermal and water drilling. Our performance in 2016 proved the value of diversification: our growth in newer markets helped sustain the company while our traditional markets began to recover. I am pleased to report that our success gained the attention of the TSX Venture Exchange: we were named one of the 2017 TSX Venture 50, their list of top performers in market capitalization growth, share price appreciation, and trading volume. For 2017, our focus is on our growth markets geothermal, fresh water and infrastructure drilling while maintaining our position in our traditional markets and regions in anticipation of the upswing in minerals and energy-related drilling was the fourth consecutive year of decline in mineral exploration. Global exploration budgets fell to $6.9 billion, barely one-third of their historic peak in On a positive note, the mineral and energy sector equities market recovered through 2016, which brought new capital and investment that should translate to new demand for exploration and drilling. After years of underexploration, quality assets are starting to be acquired by larger companies. Demand should soon begin to outpace the supply of these assets, which will inevitably lead to additional exploration. We believe that specialized drilling, which we are well known for, is more necessary than ever as future projects become more remote and challenging to access. This past year, our strategy of diversification allowed us to adapt and even thrive. By focusing on our stronger markets, we have maintained the highly-skilled staff who are at the core of our success. We have been able to exploit the strength of our mineral drilling teams and infrastructure, by applying them to the growing markets in geotechnical and energy drilling. In some geographical regions where we feel that recovery may be slower, we have put our equipment in storage, but have nonetheless held onto our senior staff. We have retained their valued skills and maintained our ability to respond when the markets return. Our approach to diversification is fine-tuned to the specifics of each market and region. In Canada, where drilling for oil, gas and energy is done in the winter, we have nurtured a summer market of geotechnical and geothermal drilling, to maximize the utilization of our equipment and personnel. We are encouraged to see oil sands development recovering: by the end of 2016, we had double the number of drills in operation that we had at the start of the year. In the US, geothermal and water drilling are increasing in importance. In California, drilling for fresh water is growing, and across the US, drilling for green geothermal saw 50% growth last year. Geothermal drilling alone may account for as much as 15% of Energold s revenue in In the US and Europe, infrastructure projects are building momentum and we are targeting this growth industry with specialized technologies such as underground horizontal drilling. Many clients choose Energold for our policy of minimizing environmental impacts while maximizing social benefits. Our portable drilling rigs require approximately 20 square metres of land and can be operated by locallyhired crews under the guidance of Energold experts. I am pleased to report that for the third year in a row, we were awarded the prestigious Empresa Socialmente Responsable (Socially Responsible Company) designation from the Mexican Centre for Philanthropy (CEMEFI). After 17 years, Energold is in a phase of renewal. From a small team with a single drilling rig we 4 ENERGOLD DRILLING CORP. ANNUAL REPORT 2016

7 Our success gained the attention of the TSX Venture Exchange: we were named one of the 2017 TSX Venture 50, their list of top performers. have grown to a global enterprise of 272 rigs, serving industries, NGOs, non-profits, and governments all over the world. While drilling for commodities will remain our principal business, we anticipate the balance will continue to shift toward urban infrastructure drilling and drilling for geothermal energy and fresh water. I am grateful for the energy and dedication of our staff, our Board of Directors and the Energold teams who represent us on projects across the globe and I look forward to a strong, renewed Energold in 2017 and beyond. Frederick W. Davidson President & CEO ENERGOLD DRILLING CORP. ANNUAL REPORT

8 Renewal through diversification: serving traditional and growing markets At Energold, we serve the traditional drilling markets: mining and oil and gas, as well as growing markets in water, geothermal, geotechnical and telecom/ infrastructure sectors. Our rigs are used in some of the world s most remote and challenging locations and in crowded urban centres. Mineral drilling with a smaller footprint We are an industry leader in socially and environmentally responsible mineral drilling. Our fleet of 139 mineral drilling rigs, including rigs that are adapted for difficult and frontier terrain, operate in over 25 countries, serving a clientele that ranges from early-stage junior explorers to many of the world s largest resource companies. For the mineral market, we offer portable diamond-drilling rigs, deep hole rigs, mobile underground drilling rigs, portable reverse-circulation (RC) rigs, and conventional RC and reverse-airblast (RAB) rigs. Complete, comprehensive energy drilling Our experience in the energy market spans over 50 years. Our fleet includes oil sands coring rigs, shot-hole seismic rigs and other specialty rigs. In the Alberta oil sands, we specialize in oil sands coring, and in the United States and Western Canada, we provide drilling rigs and teams for seismic, water, geotechnical and geothermal exploration. In the developing world, we support early-stage energy exploration with highly portable and simplified equipment which is easy to use and can be operated by local crews with Energold s guidance. Bringing clean water to communities and industry We have a worldwide reputation in rural and urban water well drilling (our Dando subsidiary has 150 years of experience in the water industry), and our teams are experienced in bringing fresh water to communities and industries as well as removing water from mines. Geotechnical drilling for infrastructure, construction and specialized projects Geotechnical drilling is a growth sector. Our teams use specialized drilling rigs to discover the nature of underground soils, foundation and rock, prior to the construction or repair of foundations for buildings, pipelines and bridges. Geotechnical drilling is also essential for soil and rock mechanic studies for mining and natural resources, and for testing the characteristics of underground soil before laying underground transmission lines, oil and gas lines, and solar and thermal storage facilities. Innovation for sustainability We have a manufacturing plant based in the UK. We design and build drilling rigs and equipment for the full scope of industrial drilling. Our manufactured equipment is used by Energold s teams and is sold to the global drilling market. We make specialized equipment for oil and gas, mineral, water, geotechnical and geothermal drilling, including multipurpose mineral exploration rigs that are capable of a wide range of drilling techniques, and lightweight rigs for the delicate tundra of the oil sands. Trenchless underground drilling We have specialized expertise and technology in horizontal directional drilling. Our trenchless method is proven in the telecommunications, water, sewage, hydro and oil and gas markets. We see this type of drilling as key to expanding our presence in the infrastructure sector, which is a significant and growing market in North America and Europe. Horizontal drilling techniques complement the skill sets of many of our other drilling teams. 6 ENERGOLD DRILLING CORP. ANNUAL REPORT 2016

9 Working for sustainability In all our practices, we strive to lessen the environmental impacts of our work and align ourselves with community goals. We believe that industries should be accountable for ensuring their operations are sustainable while generating minimal environmental impact. It is also our responsibility to treat communities and individuals with respect and work to improve lives and communities wherever possible. We have a worldwide reputation in rural and urban water well drilling, and our teams are experienced in bringing fresh water to communities and industries, and removing water from mines. Our work in the resource sector is essential: the modern world cannot exist without minerals and fuels. However, as our business models evolve, we are focusing on growing the green aspects of our business. Water drilling, for example, provides safe and clean water, often in developing parts of the world, and allows business to continue in areas affected by water shortages. Drilling for geothermal energy provides clean and sustainable heat and cooling. As markets and technologies change, we will continue to adapt and invest in research and development for the next generation of drilling and rig technology to meet the needs of tomorrow s sustainable markets. ENERGOLD DRILLING CORP. ANNUAL REPORT

10 Financials Management s Discussion and Analysis 09 Management s Responsibility for Financial Reporting 29 Independent Auditor s Report 30 Consolidated Financial Statements 31 Notes to the Consolidated Financial Statements 36

11 Management s Discussion and Analysis (For the Year Ended December 31, 2016) INTRODUCTION This Management s Discussion and Analysis ( MD&A ) is for the year ended December 31, 2016 of Energold Drilling Corp. ( Energold or the Company ) prepared as at April 3, 2017 and should be read in conjunction with the Company s audited consolidated financial statements for the year ended December 31, 2016 and 2015 and the related notes contained therein. All amounts referred to herein are in Canadian dollars unless otherwise specified. Additional information relating to the Company including material change notices, certifications of annual and interim filings, and press releases are available on the Canadian System for Electronic Document Analysis and Retrieval (SEDAR) at This document contains forward-looking statements. Please refer to NOTE REGARDING FORWARD- LOOKING STATEMENTS. CORPORATE OVERVIEW Energold is proud to have been named to the 2017 TSX Venture 50, a ranking of the top performers on the TSX Venture exchange over the last year. The Company s share price closed the year at $0.75, a 121% increase over 2015 s closing price of $0.34. In May 2016, the share price reached its highest level in two years at $1.46. Recognized internationally for its sustainable, community-based drilling and manufacturing practices, Energold serves a broad market base in the Americas, Africa and Europe. Energold s unique approach to drilling is focused on social and environmental awareness while adhering to the highest standards for health and safety. By broadening the base of the Company s activities, Energold is positioning itself to become a larger drilling company for various industries. Management is continuing to investigate ways to adapt its drills to alternative methods of drilling in order to mitigate the effects created from the downturn of the mining and oil and gas industries. Energold has over 270 drill rigs in over 25 countries and provides a comprehensive range of drilling services. As a diversified global drilling provider, the Company serves a number of sectors and its services include the following: Mineral drilling: Servicing mining and mineral exploration companies, the Company provides easily portable diamond drilling rigs, deep hole rigs, mobile underground drilling rigs, highly portable reversecirculation ( RC ) rigs, and conventional RC and reverse-air-blast rigs ( RAB ). The type of rig provided for drilling is dependent on the clients needs as each is unique and applied in specific situations. Water well drilling: The Company s wide range of water well drilling services includes fresh water drilling, mine pit dewatering, mine water supplies and mine hydrological characterization and well monitoring. Ground loop geothermal drilling: Ground loop geothermal energy is becoming an integral element of many development projects by extracting energy from the earth s latent ground temperature, either through gradient heat exchange or a full passive system through convection. Energold s access to energy drilling technologies and expertise, combined with larger drill rigs, are used to service the geothermal drilling market. Geotechnical drilling: The Company s geotechnical teams work with geotechnical, civil or geological engineers to retrieve information on physical properties of soil, foundation and rock. We build specialized rigs and provide drilling services in preparation for building engineering, footings for wind farms, bridges and other foundation construction. In mining and natural resources, geotechnical drilling is carried out as part of soil and rock mechanical studies. Energold also conducts geotechnical drilling to measure thermal resistivity of soil for underground transmission lines, oil and gas lines, solar and thermal storage facilities, etc. Energy drilling: Energold serves the industry with oil sands coring rigs, shot-hole seismic rigs and other specialty rigs. Horizontal directional drilling: Using highly specialized equipment, we have developed a trenchless method of installing cables and piping systems underground in a shallow arc along a predetermined path. Manufacturing: The Company manufactures drilling rigs and equipment for water well, mineral exploration, geotechnical and geothermal applications. It s multipurpose mineral exploration rigs are capable of a wide range of drilling techniques including wireline coring, RAB and RC. ENERGOLD DRILLING CORP. ANNUAL REPORT

12 Management s Discussion and Analysis (For the Year Ended December 31, 2016) OVERALL PERFORMANCE In 2016, the Company faced challenges in all of its divisions. While activity levels increased slightly in the minerals division as evident by its increase in meters drilled and revenues earned, the energy division faced continued challenges due to depressed oil and gas prices and activities. However, there was some recovery through year-end leading into 2017 in Western Canada. It was also a difficult year for the manufacturing division as it continued to suffer from exploration budget cuts across the mineral, oil and gas and water industries. The Company is implementing changes to its operations to reduce its costs and to ensure its projects are profitable. The Company s overall 2016 revenues decreased by 20% to $65.4 million from $82.0 million in 2015 as a result of challenges facing the energy and manufacturing divisions. The Company s overall 2016 gross margin decreased slightly to 14% from 16% in 2015 due to declines in margins from the energy division as a result of economic challenges in the oil and gas sector and decline in activity in the manufacturing division both of which have fixed costs regardless of revenue activities. Net loss for 2016 was $18.6 million compared to $23.7 million in Loss before interest, taxes, depreciation and amortization 1 was $5.4 million in 2016 compared to $8.5 million in During 2016, Energold s mineral division drilled 232,600 meters compared to 202,800 meters in As a result, revenues increased to $37.1 million in 2016 from $32.5 million in The Company s oil sands and seismic operations generated revenues of $5.5 million in 2016 compared to $10.6 million The decline in activity in the oil and gas sectors and the wild fires in Northern Alberta during the period has continued to affect the Company s financial performance. The Company s green drilling operations revenues included within the energy division were $9.6 million in 2016 compared to $16.6 million in The Company is continuing to explore opportunities in this growing industry. The Company s manufacturing operations generated revenues of $10.1 million in 2016 compared to $20.9 million in On March 4, 2016, the Company acquired all of the issued and outstanding shares of Cros-Man Direct Underground Ltd. ( Cros-Man ). Founded in 2005, Cros-Man expands Energold s services in more diverse drilling sectors. Cros-Man s primary service is horizontal directional drilling for telecommunications, water, sewage, hydro and oil and gas markets in central Canada. Since its acquisition, this division generated revenues of $3.1 million. The Company had cash of $13.7 million at December 31, 2016 (December 31, 2015 $13.6 million) and net working capital of $46.9 million (December 31, $72.6 million). The majority of the reduction in working capital is related to the reclassification of the convertible debenture from long-term to short-term liabilities and a decrease of trade and other receivables and inventories. On July 6, 2016, the Company completed a public offering in which the Company issued 5,750,000 units at a price of $1.00 per unit for aggregate gross proceeds of $5.8 million. On July 25, 2016, the Company completed a non-brokered private placement of 716,192 units at a price of $1.00 per unit for aggregate gross proceeds of $0.7 million. 1 Loss before interest, taxes, depreciation and amortization is a non-ifrs measure which the Company believes provides meaningful information about the Company s financial performance. 10 ENERGOLD DRILLING CORP. ANNUAL REPORT 2016

13 Management s Discussion and Analysis (For the Year Ended December 31, 2016) SELECT OPERATING INFORMATION Dec 2016 Sept 2016 Mineral Drill rig fleet Meters drilled 59,400 66,300 61,000 45,900* 57,400 65,000 50,500 29,900 June 2016 March 2016 Dec 2015 Sept 2015 June 2015 March 2015 Energy Drill rig fleet Meters drilled 34,200* 41,400* 42,000* 43,600* 35,700 66,200 91, ,100 *Water, geothermal, geotechnical and horizontal drilling meters are included in these figures MINERAL DRILLING Demand for Energold s services in the mineral sector has been derived traditionally from three groups of customers: precious metal mining companies, base metal mining companies and junior exploration companies. Each of these groups is impacted by distinct market forces from the industry level and also by capital market demand for its equity and debt. Exploration for precious metals continues to represent the largest demand with respect to mineral drilling activity. The business mix of the Company s mineral drilling activity has favoured well-funded, intermediate and senior miners as a result of miners shifting their focus from grassroots exploration to capital expenditures on advanced assets and mine development. There has been a significant uptick in activity in this sector as a result of new funding for the junior and intermediate mining sector, which should translate into better financial performance in There have been an increasing number of financings completed in the industry as a result of strengthening precious metal prices. While the tender opportunities have increased in some regions, cost control remains the top priority at most mining companies. However, management is beginning to see a return to exploration activities in some of the Company s key markets. New opportunities are presenting themselves as commodity prices recover from multi-year lows. The Company is also actively pursuing opportunities in Europe and increasing its presence in Africa. Some programs the Company is taking on are smaller in nature with an opportunity to become larger contracts over the coming year. Management expects an ongoing recovery from the negative effects experienced in the last few years due to the uptick in market activity. Pricing remains competitive but improvements in certain regions are likely to continue through Over the long term, management continues to believe that the vast majority of new exploration and development opportunities lie in underdeveloped regions in Latin America, Africa, the Middle East and parts of South East Asia. There is also growing opportunity in the green drilling industry including geothermal and water as well as infrastructure-related drilling. Outlook and Business Strategy The Company continues to see demand for its services despite current market conditions but the Company cautions that actual results may vary substantially from all forward-looking information in this MD&A. While the environment for mineral drilling remains impacted by the downturn of previous years, it appears that there is more positivity in the industry and there is an improvement in exploration spending worldwide. Revenue per meter has been steady with the previous year and management expects margins to continue to expand due to its efforts to improve productivity and monitor costs. Continued investment in new equipment is being considered to address market shortages in regions where few drilling companies are present. As well, management has been moving rigs to stronger markets in Central America and the Caribbean where the strongest areas of recovery are occurring. There has been a demand for complementary drill rigs from existing clients including underground drill rigs, more conventional diamond drill and reverse circulation rigs. The Company is focused on reducing inventory levels by consolidating its inventory from various sites and by minimizing its purchases. ENERGOLD DRILLING CORP. ANNUAL REPORT

14 Management s Discussion and Analysis (For the Year Ended December 31, 2016) Energold continues to maintain a well-capitalized balance sheet and remains committed to investing in areas where economic and relationship benefits exist. This advantage has provided management with the ability to manage the downturn and leverage the earliest stages of the ongoing recovery. Mexico, the Caribbean and Central America This continues to be one of the most important markets for the Company with 53 rigs located in the region. Originally pioneered with its S style rigs, which still constitute the majority of the fleet, the Company has introduced underground rigs and larger conventional rigs to meet our clients demands. The regional fleet remains active, particularly in Mexico where the Company has long held a leading market share position, especially for its frontier style, man-portable drilling rigs. In Q4-2016, the Company transferred one additional rig into the country to meet growing demand. While pricing pressure persists in the region, activity levels are improving with new contract generation and aggressive marketing activity and the Company remains competitive in the bidding processes. Approximately 83% of global meters drilled by the Company in the fourth quarter of 2016 were in this region, compared to 70% in the fourth quarter of This region accounted for 79% of year-to-date 2016 global meters drilled compared to 65% in South America The Company has 37 drill rigs in the region. No meters were drilled in this region in the fourth quarter of 2016, compared to 16% in the fourth quarter of This region accounted for 3% of year-to-date 2016 global meters drilled compared to 23% in Social and political issues play a major role in this region. Following a period of uncertainty in Argentina over the last several years, activity rebounded in the first half of the year of However, the latter half of the year was inactive. The weather in Q3 also negatively affected drilling activity in Argentina. Peru has suffered from local, political and social issues that resulted in the suspension of several potential drilling opportunities. However, management is expecting a slight recovery in this country in In Brazil, the Company has reduced exposure in the country by storing certain drill rigs, reducing overheads and laying off a significant number of field personnel until the market recovers. The Company is exploring opportunities to lease its rigs in certain regions. The Company remains the driller of choice for several key clients, especially in frontier regions where the vast majority of future exploration will take place. In each of these markets, our primary rig is the S style rig servicing more difficult and remote programs. Europe, Middle East, Africa (EMEA) & Canada The Company has 29 rigs in Africa, 14 rigs in the United Kingdom and Europe and 6 rigs in Canada. Meters drilled in EMEA was approximately 17% of global meters drilled for the fourth quarter of 2016, compared to 14% in the fourth quarter of This region accounted for 18% of year-to-date 2016 global meters drilled compared to 12% in Almost two thirds of meters drilled in the EMEA group were in Africa with the remaining meters being drilled in Europe. Management continues to seek opportunities to drill in European markets and also expects more drilling work to be done in Europe and a slight recovery in some of its African markets. West Africa which is where the Company mainly operates remains heavily exposed to junior miners. The financial environment surrounding that market has impacted activity levels but there are indications that exploration activity is in the recovery phase. The Company continues to see a stable flow of opportunities in other parts of the continent where its frontier rigs are ideal given challenging infrastructure and social issues. The Company s fully developed logistical network in Africa allows management to move equipment and personnel quickly to new markets on the continent as dictated by demand. Drill Fleet At December 31, 2016, the Company had 139 rigs in its mineral drilling fleet. The Company intends to add new equipment on an as-needed basis and can do so on a cost-advantaged basis through Dando. The Company will continue to work with certain clients who require specific equipment to meet challenging conditions at various projects. Typically, the cost of the Company retrofitting existing or building new equipment is more than offset by the value of the particular contract. The Company is continuing a modification program to increase the operational and depth capabilities of its standard S-2 and S-3 rigs. Recently, the Company has developed a conversion kit for its S rigs allowing them to conduct limited reverse circulation and open hole drilling. 12 ENERGOLD DRILLING CORP. ANNUAL REPORT 2016

15 Management s Discussion and Analysis (For the Year Ended December 31, 2016) The Company is developing additional technical ability in complementary activities including underground drilling. Included in the total rig count are 9 underground rigs. The expansion into underground drilling was in response to certain clients requests that we provide full service to their operations. The majority of the underground rigs are similar to our existing surface rigs, using substantially the same equipment and supplies. This significantly reduces crew training time and inventory requirements. Seasonality There is a reduction in drilling for most of the Company s operations in Africa during the months of June/July through to September/October due to rain. In South America, a seasonal slowdown in activity occurs around year-end due to the onset of the holiday season and weather conditions in some locations. Traditionally, lowermargin brownfield work continues throughout the year with the exception of the seasonal shutdowns in the last month of the year. Frontier exploration is generally based on exploration campaigns. The highest activity levels in the mining category tend to occur in the second and the third quarters of the year, whereas the first and especially the last quarter of the year are typically the slowest. ENERGY DRILLING Oil and Gas Drilling Oil Sands The Canadian government seeks to reduce and ultimately eliminate the discount applied to Canadian crude as pipeline projects that head south, west and east are negotiated. The Canadian government has identified the oil sands as a strategic asset supporting long-term economic growth for all of Canada and has approved several energy pipeline projects. Recent political developments in the United States indicate a greater willingness to promote new pipelines from Canada although the effects of that potential policy change will take some time. Natural Gas While gas inventories have remained larger over recent years than in the previous decade, the technical developments related to shale gas have opened up a new market for further seismic exploration, especially in the United States ( U.S. ). and in Latin America. There is growing demand for the resource as power generating companies are now able to plan and build facilities reliant on this cleaner burning, abundant and cheap energy source that supports ongoing exploration activity throughout North America. In Canada, liquefied natural gas export terminals are being planned and considered by foreign corporations to meet energy requirements overseas. These developments should have a positive impact on exploration and seismic activity in Western Canada where Bertram Drilling Corp. ( Bertram ) can deploy its fleet of seismic equipment. The environment for conventional seismic equipment is competitive in North America, although Bertram has an advantage where it can offer heli-portable services that are in short supply to access environmental and societal concerns in certain areas. Outlook and business strategy Overall, lower oil and gas prices have significantly impacted the Company s activity levels and financial performance and recovery remains uncertain. Larger companies operating in the oil sands region have reduced development budgets in accordance with lower profit forecasts over the near to medium term. Some recovery started to take hold in late 2017 as major oil and gas companies began to increase spending compared to previous years in order to meet spending commitments as well as having somewhat adapted exploration costs in accordance with new global oil price levels. Management is engaged with its long-term customers in the region who have indicated work programs are expected to increase in 2017 as long as oil prices stabilize. Prior to the downturn in the oil industry in 2015, the performance of the energy division since its acquisition in July 2011 had shown its value in terms of diversifying revenues and offsetting seasonality of Energold s mineral division while providing a platform for continued growth using the Company s strong balance sheet. Energold s management continues to work aggressively to capitalize on the potential synergies between the various divisions. The sharing of equipment, expertise, contacts, crews and logistical infrastructure helps drive revenues, operating margins and overall long term shareholder value. Furthermore, management feels it can increase revenue using the current fleet of equipment by growing market share in current businesses while penetrating new markets outside North America with the Company s knowhow when operating in remote regions. Management endeavours to keep costs under control in the Energy business although a particular level of fixed costs are required to meet day-to-day needs of the business on a year-round basis. Significant cost reductions have been implemented since Q and better financial performance is expected to resume in ENERGOLD DRILLING CORP. ANNUAL REPORT

16 Management s Discussion and Analysis (For the Year Ended December 31, 2016) Seasonality The ability to move heavy equipment into Canadian oil and natural gas fields is dependent on weather conditions. As warm weather returns in the spring, the winter s frost comes out of the ground rendering many secondary roads incapable of supporting the weight of heavy equipment until they have thoroughly dried out. The duration of this spring break-up and associated road bans has a direct impact on activity levels. Many exploration and production areas in northern Canada are accessible only in winter months when the ground is frozen hard enough to support equipment. As a result, most of the drilling occurs in the first quarter of the calendar year with April through May traditionally being the slowest time in this region. There is a current trend for increased activity in the summer and fall months, although management must consider this strategy on a case-by-case basis with the customer, as logistical costs to operate could be higher than in the winter season. The first quarter tends to be the strongest period in terms of activity for energy drilling. Cold temperatures create ideal working conditions as the frozen ground allows for near full deployment of the Company s oil sands coring fleet. The fourth quarter tends to be much quieter although the post-winter business is usually available to help offset costs of demobilizing equipment from the winter period. Green Drilling - Water, Ground Loop Geothermal ( geothermal ) and Geotechnical Recently, management has focused on growing other areas including commercial green drilling. Worldwide, demand for geothermal and water drilling continues to grow in regions where the Company currently operates and excess rig capacity from those regions can be utilized. Historically, Bertram has been able to generate consistent operating margins on its geothermal programs. The water market in particular can provide the Company with new revenue sources with tender opportunities across some of its traditional markets in Africa, as well as in North America. In doing so, management can effectively redeploy idle drilling rigs to take advantage of growth in new markets elsewhere while more traditional commodity markets recover. In the longer term, as society looks for alternative sources of energy, geothermal programs reduce energy demands and are becoming an integral part of a number of development projects and are regarded as clean from an environmental point of view. The opportunity to submit bids on new projects in the U.S. is substantial. The Company is in a strong position to participate in multi-year programs that may potentially help offset seasonality effects that take place in the oil sands coring business during the winter months. Energy and Infrastructure Meters Drilled In 2016, Bertram drilled 18,000 meters in Canada and approximately 112,700 in the U.S. compared to 94,900 meters in Canada and approximately 263,400 in the U.S. in The decline is primarily due to depressed hydrocarbon prices and the forest fires impacting Northern Alberta in Q Activity levels are not always reflective of revenues due to the type of drilling the division offers. Oil sands and geothermal drilling are more technical and require specialized equipment and skilled labour. For those reasons, pricing per meter is much higher than other types of drilling. Seismic drilling is not a highly technical process; therefore, drilling rates are priced much lower due to the speed of drilling and type of labour skills required to perform the work. Since its acquisition on March 4, 2016, Cros-Man, which does infrastructure drilling in Central Canada, drilled 30,500 meters year to date and 11,700 meters in Q Meters were drilled in the following areas: For the three months ended December 31 For the year ended December Infrastructure 11,700-30,500 - Oil sands 700-5,600 17,900 Seismic (Track and Heli-portable) - 2,800-69,100 Water wells 600-1,700 - Geothermal, Geotechnical and other 21,200 32, , ,300 34,200 35, , , ENERGOLD DRILLING CORP. ANNUAL REPORT 2016

17 Management s Discussion and Analysis (For the Year Ended December 31, 2016) MANUFACTURING DIVISION Outlook and business strategy The principal activity of Dando remains the design, manufacture and sale of mobile drilling rigs and associated equipment for water wells, mineral exploration, geotechnical investigation and environmental monitoring. Dando has an excellent reputation in Africa, South East Asia and Australia. The utilization of the Company s contacts and expertise in Latin and North America has led to significant interest from previously untapped geographical markets. Dando continues to receive growing interest for its products but revenue growth has been affected by a number of factors. Dando has been adversely affected by worldwide complex geo-political issues, a general nervousness in the market and lack of client funding or availability of foreign currency, especially for some of the large projects in the water sector. The fluctuation of commodity prices has resulted in a volatile mineral market. The drop in oil prices has also affected Dando s ability to generate revenue in the geotechnical and seismic industry space. However, Dando continues to build relationships with clients in this sector in the pursuit of securing new and long term contracts in Western Canada. The water markets are also changing and growing as shallow aquifers have been exhausted, or have become harder to find. As a result, demand is increasing for more powerful and higher priced machinery to access deeper water reserves which is a further strain on the potential customers who already find it difficult to finance their purchases. Management is focused on continuing to develop relationships across the financial community to enable competitive financing programs to help grow market share in the current weak environment. Along with other Energold subsidiaries, Dando has been using various financial instruments from Export Development Canada to assist new customers and generate contracts. Seasonal trends affect the performance of the manufacturing business in each quarter. The beginning of the year is typically reserved for participating in the annual tendering process with non-government organizations and various layers of governments worldwide. Contracts are awarded in the second and fourth quarters and revenue recognition is usually loaded in the latter portion of the year. Towards the end of the year, sales are reduced due to the holiday season. The majority of the division s tenders are in the water well manufacturing segment of the market where Dando enjoys brand name recognition for quality and longevity of equipment. ENERGOLD DRILLING CORP. ANNUAL REPORT

18 Management s Discussion and Analysis (For the Year Ended December 31, 2016) RESULTS OF OPERATIONS For the year ended December 31, 2016 compared to the year ended December 31, 2015 For the year ended December 31 (in thousands) Revenue Mineral $ 37,075 $ 32,548 $ 34,532 Energy 18,229 28,537 54,702 Manufacturing 10,096 20,891 12,067 $ 65,400 $ 81,976 $ 101,301 Loss Mineral $ (2,273) $ (7,505) $ (5,007) Energy (7,457) (9,076) (2,163) Manufacturing (5,023) (2,425) (5,116) Corporate (3,808) (4,727) (1,767) $ (18,561) $ (23,733) $ (14,053) Loss per share basic and diluted 2 $ (0.36) $ (0.49) $ (0.28) Total assets $ 108, , ,857 Non-current financial liabilities $ 3,123 14,596 15,002 Net loss for the year ended 2016 was impacted by the following factors: Mineral Revenues increased to $37.1 million in 2016 from $32.5 million in 2015 as a result of a 15% increase in meters drilled. Average revenue per meter in 2016 was $159 compared to $160 in Although the market is recovering slightly, there is still excess rig capacity in the industry. As capacity utilization rises, pricing and margins are expected to expand as the mineral division strives to maintain low operating costs. The margin for this division improved as a result of increased productivity and monitoring costs. The margin for the year ended December 31, 2016 was $4.9 million or 13%, an improvement over the comparable period of $2.2 million or 7%. Management continues to try and improve its margin by evaluating a number of ways to increase productivity and control its costs without sacrificing the quality of its drilling. Energy & Infrastructure Revenues for the year ended December 31, 2016 were $18.2 million compared to $28.5 million in The majority of the decrease is due to major operators delaying projects due to the continued low price of oil which affected performance in Q1-2016, when the majority of drilling activity in western Canada takes place. The wild fires in Northern Alberta in Q also impacted revenues. Gross margin was $3.3 million or 18% in 2016 compared to a $7.7 million or 27% in The decrease in revenue from the oil sands resulted in a lower gross margin as Bertram still has certain fixed costs in its operations although significant measures have been taken over the last two quarters to materially lower costs associated with the ongoing functioning of the business. 2 Loss per share is calculated based on losses attributable to equity shareholders of Energold Drilling Corp. 16 ENERGOLD DRILLING CORP. ANNUAL REPORT 2016

19 Management s Discussion and Analysis (For the Year Ended December 31, 2016) On March 4, 2016, the Company acquired all the outstanding shares of Cros-Man. Cros-Man has been fully consolidated in the group s results from March 4, The net assets acquired and recorded at estimated fair values totalled $4.1 million including intangible assets of $2.3 million. Consideration for this acquisition was $5.7 million in which $3.5 million was paid in cash and the balance to be paid over a period of three years ($0.6 million included in current trade and other payables and $1.6 million included in non-current trade and other payables). Since its acquisition, Cros-Man earned revenues of $3.1 million which is included in the Energy revenue segment. Manufacturing Revenues for Dando for the year ended December 31, 2016 were $10.1 million with a margin of 11% compared to revenues of $20.9 million with a gross margin of 17% in the comparable period in The combination of depressed minerals and oil and gas industry in addition to inability for Dando s clients to finance its projects impacted Dando s revenues. Indirect and administrative expenses in 2016 were $26.5 million compared to $28.0 million in Overall, the Company has been working towards reducing its expenses. The Company has managed to reduce expenses while taking on $1.4 million of costs due to the acquisition of Cros-Man in The Company recorded finance costs related to interest payments on the convertible debentures, loans and leases of $3.1 million in 2016 compared to $2.8 million in In 2016, current and deferred income tax expenses were $1.0 million compared to $3.1 million in Other comprehensive loss totaled $9.4 million in 2016 compared to a $7.7 million income in Other comprehensive loss/income is related to unrealized gains or losses on short-term investments held net of taxes and cumulative translation adjustments on foreign currency translation. The Company s subsidiaries hold balances in their functional currency; therefore upon translation to presentation currency, which is the Canadian dollar, balances on the balance sheet may increase or decrease depending on the foreign exchange rate at that time. For the three months ended December 31, 2016 compared to the three months ended December 31, 2015 For the three months ended December 31 (in thousands) Revenue Mineral $ 8,857 $ 9,986 $ 9,876 Energy 4,034 4,586 11,465 Manufacturing 1,448 4,728 1,922 $ 14,339 $ 19,300 $ 23,263 Income /(Loss) Mineral $ 1,043 $ (2,423) $ (1,695) Energy (865) (4,800) (2,038) Manufacturing (1,655) (1,079) (2,399) Corporate (2,434) (3,389) (365) $ (3,911) $ (11,691) $ (5,767) Loss per share basic and diluted 3 $ (0.07) $ (0.24) $ (0.12) 3 Loss per share is calculated based on losses attributable to equity shareholders of Energold Drilling Corp. ENERGOLD DRILLING CORP. ANNUAL REPORT

20 Management s Discussion and Analysis (For the Year Ended December 31, 2016) Mineral - Revenues increased to $8.9 million in Q from $10.0 million in the comparable period of Average revenue per meter for Q was $149 compared to $174 in Q The difference in revenue per meter is due to the different mixture of diamond drilling and RC drilling. Pricing still remains competitive and there is still excess rig capacity in the industry. As capacity utilization rises, pricing will continue to strengthen and margins will expand as the mineral division strives to maintain low operating costs. The margin for the three months ended December 31, 2016 in this division was $1.3 million or 14% compared to $1.0 million or 10% in the comparable period in Drilling programs have started to grow in size as the recovery continues and margin expansion is expected to continue as costs remain low and pricing becomes more firm in several key markets. Management continues to try and improve its margin by evaluating a number of ways to control its costs without sacrificing the quality of its drilling. The Company maintains a strong infrastructure network in all regions where it operates, which allows for relatively lean operations and enables the Company to respond quickly to new opportunities. Indirect and administrative expenses were reduced in Q to $6.3 million compared to $7.7 million in Q due to the Company s efforts in monitoring and reducing its expenses. $0.3 million related to expenses from the Cros-Man acquisition. The Company recorded finance costs related to interest payments on the convertible debentures, loans and leases were comparable at $0.7 million in Q and Q Current and deferred income tax expenses were $0.2 million in Q and $1.8 million in Q Other comprehensive loss totaled $2.4 million in 2016 compared to $0.9 million income in the comparable period of Other comprehensive loss/income is related to unrealized gains or losses on short-term investments held net of taxes and cumulative translation adjustments on foreign currency translation. The Company s subsidiaries hold balances in their functional currency; therefore upon translation to presentation currency, which is the Canadian dollar, balances on the balance sheet may increase or decrease depending on the foreign exchange rate at that time. Energy & Infrastructure - Revenues for the three months ended December 31, 2016 were $4.0 million compared to $4.6 million in same period for Activity levels are still lower than what the Company has experienced in previous years due to continued challenging times for the industry. Gross margin was $0.9 million or 23% in 2016 compared to a break-even in the comparable period of The division still has certain fixed costs in its operations, although significant efforts have been made to reduce costs over the past year. Manufacturing - Revenues for Dando in Q were $1.4 million with a margin of 11% compared to revenues of $4.7 million with a gross margin of 16% in Q Several orders that management had expected did not materialize; therefore performance in this division has not met expectations. 18 ENERGOLD DRILLING CORP. ANNUAL REPORT 2016